8299269
Description
Flashcards by Cara Czech, updated more than 1 year ago
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Created by Cara Czech
about 7 years ago
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| Question | Answer |
| The 4 types of firms are... | 1. Sole Proprietorship 2. Limited Partnerships 3. Limited Liability Companies (LLC) 4. Corporations |
| What are sole proprietorships? | - Most common type of firm - Owned and run by one person - Very small and easy to create - no separation between firm and owner - life of company is limited to life of owner - owner has unlimited liability for firm's debt |
| What is a partnership (as type of firm)? | - sole proprietorship with more than one owner - all partners personally liable for firm's debt - ends with death or withdrawal of any of the partners |
| What is a limited partnership (as type of firm)? | - two types of owners: General Partner and Limited Partner - Limited partner can't lose more than his initial investment - death of limited partner doesn't end the life of the partnership, ha has no managerial duties |
| An "LLC" is... | - Limited Liability Company - Can be private or public - Owners have limited liability for firm's debt |
| Corporations are... | - legal entity, separate from its owner - owners aren't liable for debt, contracts etc - more costly to set up a corporation than any other type of firm (because it is a legal act) - owned by shareholders |
| Where is the difference between "S-Corporations" and "C-Corporations"? (In the USA) | C-Corporations: Shareholders pay tax twice (once when the company pays tax, once when the shareholders pay tax on their profits from the ownership S-Corporations: Only taxed once, maximum 100 Shareholders, all US Citizens |
| What is the role of a board of directors? | Within a corporation... - monitor performance - sets policy - ultimate decision-making authority The board is elected by Shareholders |
| What is the role of a CEO (in contrast to the board of directors)? | Day-to-Day decision making CEO can also sit in the board of directors |
| What are agency problems? | Conflicts arising from different interests of managers and shareholders. |
| What are the two options in case of corporate bankruptcy? | Reorganization and Liquidation |
| What are accruals? | Expenses or revenues that have already occured, but haven't been recorded yet. (Nebenkostennachzahlung) |
| What are deferrals? | Recorded expenses or revenues that still affect next accounting period (Miete im Voraus bezahlt) |
| What is a prepayment? | A payment paid in this period, for a benefit received in the next period. (=Deferred Expense) |
| What is deferred revenue? | Money received in this period for a service rendered in the following period |
| What is an accrued expense? | A benefit used in this period which will be invoiced in the next period |
| What is an accrued revenue? | A service rendered this period which can only be invoiced in the next period. |
| What is a provision? | - future cash out-flow as result of past event - amount or timing is uncertain - reliably estimate can be made |
| What is a contingent Liability? | A possible obligation, dependent on future events that can't be controlled OR a present obligation that can't be recognized because the size can't be measured precizely ITS NOT RECOGNIZED IN THE BS (but mentioned in the notes) |
| How do you create a provision (in the Balance sheet)? | DEDUCT from Profit, ADD same amount as provision in Liability |
| How do you use a provision? (on the Balance sheet) | DEDUCT from Cash Assets, DEDUCT from Provisions in Liabilities |
| How do you reverse a provision? (on the balance sheet) | ADD to profit (equity) DEDUCT from provision account (liabilities) |
| What is asset impairment? | An adjustment of the net book value of an asset because the real value is lower. |
| How do you account for an impairment? | DEDUCT impairment loss from Asset value, DEDUCT same amount from equity |
| What are bad and doubtful debt? | Bad debt: Company A owes you 100€ but for sure won't pay it back Doubtful debt: Company B might not be able to pay back 100€ |
| How do you account for Bad Debt? | DEDUCT from asset receivables, DEDUCT from profit (equity) |
| How do you account for doubtful debt? | DEDUCT valuation allowance from assets, DEDUCT same amount from profit of the year |
| What are hidden reserves? | Unnecessary provsions for not existing obligations, impairments to lower current profits and "use" them in later periods |
| What is the definition of a competitive market? | A market at which a product can be bought and sold at the same price. |
| What is the definition of the market interest rate? | A market interest rate is the exchange rate at which we can exchange money today for money in the future. (=1,00€ today buys 1,07€ in one year if the interest rate is 7%) |
| How do you calculate present and future values? | FV=PV*interest rate (107=100*1,07) PV=FV/interest rate (100=107/1,07) |
| What is arbitrage? | Arbitrage is the process of trading to take advantage of equivalent goods that have different prices in different competitive markets. |
| What is a normal market? | A normal market is a competitive market with no arbitrage opportunities. |
| What is the separation principle? | The separation principle states that security transactions in a normal market don't create or destroy value. |
| What is value additivity? | Value additivity implies that the value of a portfolio is equal to the sum of its parts. |
| What is worth more? Money today or money in one year? | Money today is worth more than money in one year. |
| How do you calculate the present value of a perpetuity? (Perpetual=never ending) | PV of Perpetuity =Constant Cashflow/interest rate |
| How do you calcuate the present value of an annuity? (annuity=yearly payment) | |
| How do you calculate the Future Value of an annuity? (annuity=yearly payments) | |
| How do you calculte the PV of a growing perpetuity? | |
| What is the internal rate of return? | The IRR is the average percentage return on the investment. The other way around: it is the discount rate at which the investment has zro NPV. |
| What is capital budget? | It is a list of projects that the company plans to undertake. |
| What is capital budgeting? | Capital budgeting is the process of analyzing alternative investments and deciding which ones to accept. |
| What are incremental earnings? | Incremental earnings are the amount by which an investment is expected to change the profit of the company. |
| When calculating incremental earnings, what needs special attention? | Espenses for long term assets aren't recorded as expenses. Instead, their depreciation is regarded in the calculation of incremental earnings. Also, interest expenses aren't regarded. |
| What are project externalities? | Project externalities are indirect effects of a project on the companies profits. For example, if Ben&Jerries launches a new flavor, that might shortly decrese the consumption of existing flavours. |
| What is cannibalization? (In business terms) | Cannibalization is an example of project externalities. It means that the introduction of one product reduces the consumption of another product of the same company. |
| Should fixed overhead costs be included in the calculation of incremental earnings? | No. FIXED overhead don't change, depending on the investment takes place or not. So, they're irrelevant for calculating incremental earnings. |
| Should the costs for (already executed) R&D be included in the calculation of incremental earnings? | No. Sunk costs are irrelevat for decision making. |
| What is the free cash flow of a project? | Free cash flow is the incremental effect of a project onto the available cash of a company. |
| Where are the differences between calculating free cash flow and incremental earnings of a project? | Capital expenses aren't included in the calculations of incremental earnings, but they are included in the free cash flow. Depreciation isn't though. |
| What is the Net Working Capital? | NWC=Current Assets-Current Liabilities NWC=Cash+Inventory+Receivables-Payables |
| What is the trade credit?q | Trade credit is the difference between receivables and payables. |
| What is a sensitivity analysis? | Sensitivity analysis shows how the NPV varies with a change in one of the assumptions, holding the other assumptions constant. E.g. sales price |
| What is a scenario analysis? | Scenario analysis considers the effect on a project of changing multiple parameters simultaneously. |
| What is the unlevered Net Income? | (Revenues-Costs-Depreciation) * (1-t) =(Revenues less cost, less depreciation) after tax |
| How do you calculate the Free Cash Flow? | FCF=Unlevered Net Income+Depreciation-CapEx-Change in NWC OR FCF=(Revenues-Costs)*(1-t)-CapEx-Change in NWC+(t*Depreciation) |
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